Publisher

ILOMATAILOMATA

Journal Ilomata International Journal of Tax and AccountingIlomata International Journal of Tax and Accounting Abstract

This study investigates the impact of credit risk management on the financial performance of commercial banks in Nigeria. It aims to assess how key credit risk indicators—capital adequacy ratio (CAR), cost-to-income ratio (CIR), and non-performing loans (NPL)—influence bank profitability. The study employs a panel regression model, utilizing secondary financial data from commercial banks operating between 2010 and 2022, sourced from the Central Bank of Nigeria and other official records. Descriptive analysis, normality tests, correlation analysis, and panel regression techniques are applied to examine the relationships between variables. The results reveal a strong negative correlation between CAR and CIR, indicating that higher capital adequacy is associated with improved financial efficiency. However, regression analysis shows no statistically significant relationship between credit risk management variables and financial performance, as reflected in return on equity (ROE) and return on assets (ROA). This suggests that while credit risk management practices affect cost efficiency, their direct impact on profitability remains inconclusive. The findings highlight the complexity of credit risk management in commercial banking. While maintaining adequate capital buffers contributes to cost efficiency, other external economic factors may be more significant in determining profitability. The study underscores the need for commercial banks to refine their risk assessment and mitigation strategies to enhance financial stability and performance. Despite credit risk managements theoretical significance, its direct influence on financial performance appears limited. Banks should implement more effective risk assessment frameworks and recovery mechanisms for non-performing loans to optimize financial outcomes. This study contributes to the limited empirical research on credit risk management in Nigeria by providing a comprehensive panel data analysis. Unlike previous studies, it examines correlations and regression effects, revealing that credit risk management practices influence cost efficiency more than profitability.

Conclusion

The study found significant correlations between credit risk management practices and financial performance.A strong negative correlation existed between the capital adequacy and cost-to-income ratios, suggesting higher capital adequacy is linked to improved financial efficiency.However, the panel regression modeling revealed no statistically significant relationship between credit risk management practices and financial performance, indicating that the identified practices do not significantly affect banks financial performance.

Future Research

Further research should explore the impact of credit risk management on the financial performance of insurance firms in Nigeria, given the limited existing research in this area. Additionally, studies could investigate the effectiveness of different risk assessment frameworks and recovery mechanisms for non-performing loans in enhancing financial outcomes for Nigerian banks. Finally, research could focus on identifying the external economic factors that significantly influence bank profitability in Nigeria, complementing the understanding of internal credit risk management practices. These investigations should consider the unique characteristics of the Nigerian financial landscape and aim to provide actionable insights for policymakers and banking professionals, ultimately contributing to a more stable and efficient financial system. A comprehensive analysis of these factors, utilizing advanced econometric techniques and incorporating qualitative data from bank executives, would provide a more nuanced understanding of the complex interplay between credit risk management, external economic conditions, and bank profitability in Nigeria. This research should also consider the role of regulatory policies and their impact on banks risk management strategies and financial performance.

References

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